What does the reserve requirement specify?

The reserve requirement specifies the percentage of total deposits that banks must keep in reserves. This regulation is set by the central bank and determines how much liquidity a bank must hold relative to its customer deposits, safeguarding against unexpected withdrawals. By setting a reserve requirement, the central bank controls the money supply in the economy, as higher reserve ratios can lead to less money available for lending, while lower reserves can encourage more lending and investment. This mechanism is vital for maintaining stability in the banking system and ensuring that banks have enough currency on hand to meet the demands of their depositors.